The Limits of Drill Baby Drill
Why oil companies don't want to lose their shirts again
I’ve been hearing a lot from Trump supporters, including Trump himself and his Treasury nominee, Scott Bessent, that drilling for more oil is the key to Trump’s economic success. They want to increase US oil production by over 20%, which would mean producing 3 million more barrels of oil each day.
But here’s the thing: none of these folks seem to understand a few basic facts. First, the US currently produces more oil than any other country has ever produced in human history. Second, you have to sell oil for more than it costs to make it profitable. Third, oil companies in the US need an oil price above $60-$70 per barrel to make money from drilling new wells. And fourth, the current price for oil is around $70 per barrel.
So, it’s no surprise that the price of oil is currently at the bottom of the profitable range for oil companies. That’s just how markets work. No one sells a product for less than it costs to make. So, why would oil companies want to increase their production so much that the price of oil drops? It doesn’t make any sense. That’s why oil companies are only slowly increasing their production and have been doing so ever since the pandemic ended.
Oil companies remember what happened during the pandemic. The price of oil dropped dramatically because demand dropped. They got caught with their pants down because the price for producing oil was higher than the selling price. They lost a lot of money. Trump and Bessent can keep saying “drill baby, drill” all they want. But oil companies aren’t going to listen. They don’t want to lose money again.
So, what does this mean for our economy? Lowering the price of oil won’t tame inflation. Oil companies are likely to increase their production slowly until we hit another recession. Recessions are a part of any economy. Trump won’t be able to create an economic boom out of oil production. That’s just the way things are. And it’s not surprising that Trump doesn’t know better. He’s not exactly the sharpest tool in the shed. But it’s surprising that Scott Bessent doesn’t know better. Maybe he does know better and is just trying to fool the public. He wouldn’t be the first Treasury head to try to do that.